Matthew Holt

When is the same spending more spending?

When it’s routed through the government because their spending is done with mythically different dollars than private spending. Or at least it is in the bizzaro world of free-marketeer policy analysts. Let me explain…

A couple of weeks back a small consulting firm working for McCain sent me an article written by University of Minnesota economist Roger Feldman about the cost of Obama’s health plan. They were complaining that I hadn’t featured their analysis. So I read the report which suggested that the Obama plan would cause $450 billion in health spending. Bear in mind, Obama suggests that it’ll cost $65 billion, so this is quite some stretch.

I was going to write a long, learned article about this, but instead I’ll just show you the email back & forth.

First, here is my reply to the consulting company Lisa Tomai’s request for publicity.

So Health Affairs had an article
a week or so back that covering all the 45 odd million uninsured would
cost an extra $120bn, or about $2,400 per head each given that they’re
younger and healthier than the average population–and adding it to the
spending that’s already happening. That’s in the ball park of many
similar estimates.

Your article says that giving insurance to just 25m
of the $45m would cost $450 billion or $18,000 each–or more than
double average health care spending per head (which includes Medicare!)
But hang on, 12m of the 25m are kids who cost almost nothing to cover
(or nothing as a % of $18,000) but you say that’s going to cost $211
billion? That’s $17,500 each!

The only explanation is
that the model included 5m uninsured kids who are cancer patients about
to go through chemo. Or is the assumption that the Obama plan will buy
every kid a Nintendo Wii and a new racing bike every week? … I might
be prepared to look at this and treat it as a serious study if you
break down the assumptions behind the numbers on page 5. But this just
doesn’t even pass the sniff test. Not to mention that it’s written by
the "Blue Cross" prof on behalf of the other guys campaign. (not that
I’m averse to calling Obama out on his BS too)

On the other hand if it’s right, time to buy Wellpoint & UHC stock!

Then the author Feldman chimed in:

I read your exchange with Lisa and wanted to weigh in on
the cost of the Obama plan. Everyone agrees that the cost of covering
the uninsured would be small IF we could only target additional
spending to them. The problem is that such targeting is not possible,
or at least it seems politically infeasible. Much of the cost of the
Obama plan would consist of subsidies for people who already purchase
insurance. This includes many kids, who, in my reading of the plan,
would be entitled to free coverage under a generous PPO resembling the
FEHBP standard option Blue Cross plan. Other subsidies would go toward
helping low-income individuals purchase insurance (a better idea, but
given the that the middle class would be eligible for a partial
subsidy, still expensive) and federalization of the reinsurance
industry (totally unnecessary). Many of these points apply to other
proposals, such as the idea of refundable tax credits to help people
purchase insurance.

I responded to Feldman:

Thanks for the details. Presumably you think that Obama’s plan
cannot work as stated and therefore the uptake of the subsidies will be
much wider than anticipated.

Fair enough. In which case there will be either be the dreaded
"crowding out" of privately-funded private insurance by publicly funded
private insurance (in the case of kids, extension of FEHBP and the
Federalization of reinsurance) OR those people & corporations
receiving subsidies will buy vastly increased amounts of more insurance
to go on top of what they’re currently spending privately. While AHIP
would be delighted about the latter case it seems very unlikely.

However, most conservative/libertarian economists/policy wonks I
know are consistently concerned about the first case. So if the $450
billion figure is true, then about $350 billion of it is REPLACING
private spending. Because many free-marketeers believe that a dollar
spent by a public entity is intrinsically different to one spent by a
private entity, this causes them great consternation. But, we are not
talking about the Obama plan adding $450 billion to overall health care
costs. When CMS creates the national health accounts, all dollars look
the same regardless of source (as they do to the recipients).

And then Feldman wrote back:

I agree that the Obama plan would not increase national health care
spending by $450 billion. In order to calculate that number, one would
need to know the extra spending that occurs when an uninsured person
becomes insured (what economists call moral hazard), as well as the
extra spending that occurs when people switch from less-generous to
more-generous policies (the Obama plan specifies a policy that is more
generous than those held by most Americans). In the most optimistic
scenario, one could also subtract certain reductions in costs such as
savings in public medical spending for the indigent. I did not attempt
to conduct that type of analysis.  Instead, I conducted the type of
analysis that CBO will be asked to do when and if the Obama plan is
proposed as legislation. I would take issue with one point.
When the government finances health care spending with taxes, it will
cause ‘distortions’ in the economy because people will work less if
their income is taxed and save less if their interest income and
capital gains are taxed. While there is some disagreement over the
size of these distortions, there is no doubt they exist. Therefore,
transferring $1 of spending from the private sector to the public
sector is not a neutral swap. The cost of these distortions is not
included in the CMS accounts.    

So I responded:

So your paper needs to explain whether you think the plan increases overallspending or whether its replacing private with public spending. If it’s theformer, your analysis doesn’t pass the sniff test. If (as I suspect) it’smostly the latter plus Obama’s indicated >$100 billion increase, you may notlike it, but it’s a legitimate policy proposal.

Especially as public spending on health care in the US seems to be
more effective and more efficient than private spending (see Medicare
Advantage, the VA, etc), which only goes to show how incredibly
inefficient the private health care industry is.

To which Feldman said…

We do not disagree that the Obama plan is a legitimate policy
proposal.  Either it or the McCain proposal — in some form — will be
the  framework for legislation in 2009.

Hmm.  How much does Medicare pay for a walker?

2 replies »

  1. SteveH,
    You are both right. Broadly speaking, moral hazard encompasses the activities undertaken by someone because they don’t bear the full consequences of their actions. That is, it’s stuff you do while insured that you wouldn’t do if you were on the hook all by your onesies.
    So driving faster with insurance than you would otherwise is moral hazard (increasing risk). It’s also getting the chip in your windshield replaced because it’s covered by insurance, when you might not if you were paying out of pocket. Both are changes of behavior due to the fact you don’t bear the financial exposure.

  2. Feldman wrote: “In order to calculate that number, one would need to know the extra spending that occurs when an uninsured person becomes insured (what economists call moral hazard)”
    That’s not my understanding of moral hazard. wikipedia defines moral hazard here: “Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.”
    All health care spending that occurs due to someone being insured who was previously uninsured does not occur because of “moral hazard.” Moral hazard would occur if someone who is uninsured and becomes insured decides to take up skydiving because now, if anything goes wrong with their chute, they won’t have to pay the costs of care out of pocket. That would be a small part of any costs incurred under Obama’s plan. The majority of expenditures would come because people who need health care but don’t have access to it because they can’t pay for the care would actually seek care. That is not moral hazard.
    But I’m open to correction if I’m wrong.